VGAS.L Regulatory News (VGAS)

10 July 2017

Volga Gas plc

("Volga Gas", the "Company" or the "Group")

Operational Update

Volga Gas plc, the oil and gas exploration and production group operating in the Volga Region of Russia, is pleased to provide the following update on its activities and operations:

Highlights

· Successful introduction of Redox based gas sweetening process at the Dobrinskoye gas plant to increase profitability and reduce waste

· Processing throughput set to rise back to the planned 1 million cubic metres per day of gas

· Construction of the LPG equipment has commenced and expected to complete in September 2017

· Drilling continues on the Uzen 101 horizontal production well after a short exploration sidetrack of the well discovered a previously unproven small but commercial oil accumulation

· Realised prices after adjusting for export taxes and transport costs, increased to $34.43 per barrel during the first four months of 2017 (H1 2016: US$23.84)

· Group's cash position decreased from $19.7 million on 31 December 2016 to $13.8 million on 30 June 2017 after payment of US$5.0 million in dividends and US$7.0 million in capital expenditure. Total debt is unchanged at US$4.2 million

Production

As announced on 4 July 2017, Group production in H1 2017 averaged 6,168 boepd (H1 2016: 5,933 boepd). The underlying productive capacity of the existing production wells remains in excess of 8,000 boepd but the throughput at the gas processing plant was reduced during the transition to the new Redox based gas sweetening process as described below.

In addition, during the period January to April 2017, as a result of another abnormally mild winter, ground conditions close to the Group's oil field resulted in the routes used by our customers' oil tanker trucks being unpassable, leading to significant periods in which the oil production was shut in and actual output was below management's expectations. Given the minor proportion of the Group's production this represents, the impact on total production was not significant.

Realisations

In spite of some recent softening in international oil prices, the domestic sales prices achieved by Volga Gas for oil and condensate have been stable throughout H1 2017 at approximately US$34.43 per barrel of oil). Currently the domestic market netbacks are higher than would be achieved from exports after taking into account export taxes and transportation costs. The average realisation in H1 2016 for oil and condensate was US$23.84 per barrel.

The change in our gas sales arrangements in 2017, with sales being made directly to Gazprom's distribution system, led to improved sales prices in Ruble terms to approximately RUR 3,856 per thousand cubic metres excluding VAT (2016: RUR 3,559). Combined with the recovery of the Ruble, the average selling price for gas for H1 2017 was the equivalent of US$2.04 per mcf (H1 2016: US$1.44/mcf).

Field development operations

The main field development activity under way is on the producing oil field, Uzenskoye. Drilling of the new horizontal well #101 commenced as planned on 27 April 2017. Although mainly being drilled to develop the proved but currently undeveloped Albian reservoir in the Uzen field, the well was initially sidetracked to investigate potential unproven structures. While one possible target was dry, a second oil accumulation was encountered. Initial estimates put the potential additional reserves at between 250,000 and 500,000 barrels of recoverable oil. This would be a useful addition to the oil reserves which as at 31 December 2016 were 5.4 million barrels, but only a minor increment at the Group level.

Drilling operations are expected to continue for the next 3-4 weeks and the results of this operation are expected to be available during August 2017. As a result of these activities, the oil production capacity is expected to increase from approximately 800 bpd to over 1,500 bpd, depending on the actual results of the horizontal well #101.

Gas plant development

The Dobrinskoye Gas Plant has been running consistently at close to the maximum processing rate of 1 million m3 per day of gas since July 2016.

Following successful industrial testing during May 2017, in June 2017 the gas processing plant switched entirely to Redox-based gas sweetening. While the change in process did not require extensive new construction at the plant, minor modifications and additional items of equipment are required, and while these were installed, production capacity has been temporarily reduced. This had a particular impact on output in June 2017 when gas throughput averaged 230,000 m3/day. Output has currently risen back to 350,000 m3/day and is planned to be back up to 750,000 m3/day by the end of July 2017.

The key benefits of the Redox-based gas sweetening process are significantly reduced cost of consumables and effective elimination of the need to dispose of bulky spent chemicals.

The other key development at the gas plant is the construction of cryogenic separation of liquid petroleum gases ("LPG"), which is currently either flared as part of the condensate stabilization process or included with the sales gas. The majority of long lead items of equipment have been delivered and construction has commenced. The LPG project is expected to be commissioned during Q4 2017. The LPG project will provide an additional product stream which is expected to increase total sales volumes by approximately 10% and to enhance profitability. The project is expected to be completed within the budgeted capital cost of US$5.0 million.

Finance

Mainly as a result of higher production rates and development of condensate exports which have enabled continuous production through periods of disrupted domestic markets, the Group's revenue and EBITDA numbers in H1 2017 are materially ahead of those experienced in the equivalent period in 2016.

In addition, net of cash outflows on capital expenditure of approximately US$7.0 million during H1 2017 and the payment in May 2017 of US$5.0 million in dividends, the cash position decreased to US$13.8 million compared to US$19.7 million as at 31 December 2016. Total debt is unchanged in RUR terms but with the revaluation of the Ruble currently stands at US$4.2 million.

Andrey Zozulya, Chief Executive of Volga Gas commented:

"I am delighted at the initial results from our switch to Redox-based gas sweetening and aim to bring the production back up to our planned rate within the coming months. I am also excited about the prospect of delivering a healthy increase to oil production when we complete the #101 horizontal well on Uzen.

"Apart from delivering further increases to the Group's production management is aiming to improve profitability through the successful completion of ongoing projects, to maximising the potential of the Group's assets."

Market Abuse Regulation (MAR) Disclosure

Certain information contained in this announcement would have been deemed inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 until the release of this announcement.

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Editors' notes:

Volga Gas is an independent oil and gas exploration and production company operating in the Volga region of Russia. The company has 100% interests in its four licence areas.

The information contained in this announcement has been reviewed and verified by Mr. Andrey Zozulya, Director and Chief Executive Officer of Volga Gas plc, for the purposes of the Guidance Note for Mining, Oil and Gas companies issued by the London Stock Exchange in June 2009. Mr. Andrey Zozulya holds a degree in Geophysics and Engineering from the Groznensky Oil & Gas Institute and is a member of the Society of Petroleum Engineers.

Glossary

bbl Barrel

bopd Barrels of oil per day

bpd Barrels per day

boepd Barrels of oil equivalent per day, in which 6,000 cubic feet of natural gas is equated to one barrel of oil

mcf thousand cubic feet

mmcfd Millions of standard cubic feet per day